NY Real Estate Lawyer Blog

A Lease with Option to Purchase is a Lease that contains a method for the tenant to elect to purchase the property on or before a certain time period.  There are usually payments, in addition to rent, that need to be made in order to keep the option open.  These payments are used towards the ultimate purchase price, but are forfeited if the option is not exercised.  An option to purchase is considered “time of the essence”, meaning that if the tenant does not exercise the option strictly, it will be forfeited, along with the option payments made.  There may be some leaway for a tenant if the time delay is de minimus, and no prejudice has inured to the landlord.

Options to Purchase can be dangerous for both the landlord and the tenant.  What a landlord needs to be concerned about, is that if the tenant is in breach, and a summary proceeding is necessary, the tenant may try to hold it up by claiming the option to purchase was breached by the landlord.  the tenant brings an action in Supreme Court, it could stay the summary proceeding.  In the meantime, the landlord may not be able to collect rent if the tenant is refusing to pay.  A Supreme Court action could take many months. The tenant could also attempt to file a notice of pendency with the County Clerk, which would prevent the owner from selling the property to anyone else while the action is pending.  On the tenant’s side, if they do not strictly comply with the lease, they may forfeit the sometimes substantial option payments.

A tenant may wish to have a Lease with Option to Purchase to give them the opportunity to build up credit, and make payments towards the purchase price over time.  They may not have the ability to purchase outright.  A landlord is being compensated for giving this option, because if the option is not exercised, he or she will be able to keep the extra payments as compensation.

I have seen parties craft their own Option to Purchase, without either side consulting an attorney. This is most likely to lead to problems, because the law of options is very specific, and needs to be known before entering into such contracts.  Both the landlord and tenant would be wise to have their own separate counsel to advise them of the responsibilities, benefits and risks in entering into such contracts.

Cynthia M. Burke, http://www.nyrealtylaw.com

Lately, I’ve been asked a lot of questions regarding the Basic and Senior Enhanced Star Property Tax exemptions in New York State.  In order to receive the exemption, you must own and reside in your home, and file in a timely manner to the proper office, which depends upon where you live.  In Nassau County, you must apply before the end of the year at the Nasau County Clerk’s Office in order to receive the exemption for the following year.  Once you apply for basic star, you do not have to reapply.  You will need a copy of your Deed, which you can get at the County Clerk’s Office if you do not have it.   If you do not live in Nassau County, refer to the New York State Governor’s Office for the time-frames and filing offices for your particular area, as well as other useful information regarding the Star programs. It is so easy to apply for the exemption that it would be a shame for anyone to miss out on receiving it, especially with the continuously rising school taxes in New York.  If you buy a property that already has a Basic Star Exemption, you will get the exemption for the remainder of the tax year, but will need to apply in your own name to continue receiving the exemption.If you are buying a property, you should check to see if Senior Enhanced Star, Veteran’s Exemptions, or other exemptions are in effect, since you will have a rude awakening when the tax assessor catches up with you.  You will be required to pay the restored taxes retroactive to the date of transfer, and your taxes will most likely increase substantially.  This also happens in estate situations, where restored taxes are due retroactive to the date of death of the owner.  The estate will be responsible for the restored factor to the date of transfer, and the new owner from that date forward.

Senior Enhanced Star applies to persons sixty-five years or older (by December 31st of the year applied for) who earn less than $66,050 combined income for 2006-2007.  This amount changes each year, and the exemption must be renewed each year, or it will be lost.  Although there are a limited number of exceptions (siblings and spouses), generally all owners will need to reach the age requirement.  Proof of income, by way of tax returns, is also required each year.  There is also a form for automatic income verification each year

Cynthia M. Burke, http://www.nyrealtylaw.com

 

There are three types of broker arrangements - seller’s agent, buyer’s agent, and dual representation.  By far the most frequent situation is that the broker is acting as a selling agent.  This must be disclosed to all parties in writing and signed by the parties.  The broker may be acting as the listing agent - the one that listed the premises, most likely on the Multiple Listing Service.  The selling agent is the broker who finds the purchaser, although he is still technically representing the seller.  This allows the listing broker to obtain his commission from the seller.  A buyer’s broker will be representing the purchaser’s interest, but may have a more difficult time collecting a commission from the seller, or may have to charge the buyer.

Once a purchaser’s offer is accepted by the seller, the broker may ask the purchaser to sign certain forms.  One form is called a Sales Agreement, and this document is not simply a binder.  A Sales Agreement is tantamount to a contract of sale, and binds the purchaser and seller to the deal, giving each party rights and responsibilities.  The last paragraph allows for a three day attorney review, but in reality, the Sales Agreement does not reach an attorney until after three days have elapsed, or when it is received, a more formal contract is prepared and entered between the parties.  However, if one party backs out, a broker’s commission may still be owed to the broker, and the parties may have rights against each other that can be enforced in court.  I advise my clients not to sign anything, especially a Sales Agreement, without having them reviewed by me.  I would advise my clients not to sign a Sales Agreement given to them by a broker, but to let the attorneys draft a formal contract.

In the meantime, a binder, which is a more simple document, setting forth the purchase price, down payment, mortgage amount, time of closing, personal property included in the sale, and specifically stating that it is subject to an engineer’s inspection and attorney review, is acceptable.  The attorney will use this document to prepare a more formal contract of sale.

Prior to being retained, a broker will have the seller sign a commission agreement and/or listing agreement, setting forth what price is acceptable, for how long the listing is in effect, and when the commission is earned.  Some agreements state that the commission is earned when the broker finds a ready, willing and able purchaser is found at the listing purchase price, or other agreed upon amount (to be set forth in writing and signed by the parties).  The best practice for a seller is to have the agreement specify that the commission is not due unless a closing takes place and the property is transferred, or upon the wilful default of the seller.  Otherwise, in accordance with case law, the commission may still be payable if the deal falls through because the “meeting of the minds” takes place at the time the parties enter into a contract, and not at the closing.  I have won cases for a broker on deals that did not close because the broker found a purchaser ready, willing and able to purchase the home, but the seller refused to proceed to closing.

As is the theme of this blog, the best practice, even in situations where you think you can sign a simple document prepared by a broker, it is best to have a lawyer protecting your interests.  Once something is signed, it is difficult, if not impossible, to change your mind, and there may be legal consequences that you did not realize or contemplate in the documents presented to you.

Cynthia M. Burke, http://www.nyrealtylaw.com

This is a tax device utilized by investors who do not reside at the property, but rent it out for profit.  There are many rules associated with like kind exchanges, but the basic idea behind it is that you are selling an investment property and buying a new investment replacement property.  With depreciation and market value rising, there is most likely a large capital gains tax associated with the sale.  To avoid paying capital gains tax now, by rolling the gains into the new property, and following the IRS rules, capital gains tax can be deferred.  When the last property is sold, and no qualified replacement is purchased, then tax utilizing the basis of the first investment property and the sale’s price of the last property will be utilized to calculate capital gains tax.

The only way to avoid the capital gains tax permanently would be for the last property being owned at the time of the owner’s death.  At the current time, the laws provide that heirs receive real property with a “stepped up” basis.  This means that for capital gains purposes, they are receiving the property with a basis of the market value as of the date of death.  For example, if the property had a basis of zero with depreciation on the date of death, and the market value was $500,000, then the heirs would receive a basis of $500,000, not zero.  Therefore, if the heirs sold the property within six months of the date of death for $500,000, there would be no capital gains tax due.

To do a 1031 Exchange, a qualified intermediary (QI) is necessary.  The QI prepares the necessary exchange documents and arranges to hold the purchase price of the first property in escrow pending the purchase of the second property.  There are specific time frames for designating a replacement property, and a specific time-frame for closing on the second property from the closing of the first property.  If these time-frames are not followed to the letter, the exchange will not qualify as a 1031 exchange.  If you try to back date something, the IRS can assess very high fines.  If the exchange is done within three business days, a simultaneous exchange can be performed.  This is where the checks from the sale are made out directly to the seller on the purchase side.  In this way, money does not have to be held in escrow.  However, no monies can go into the hands of the exchanger.  If any monies are received it is considered “boot” and must be reported to the IRS.

Cynthia M. Burke, http://www.nyrealtylaw.com

Closing costs can add up quickly at a closing, and include title insurance, attorney’s fees, bank attorney’s fees, title searches, survey costs, discount points, processing fees, mortgage broker commission, etc. etc.  You also have reserves picked up by the bank for hazard insurance and real estate taxes, and you will need to have current real estate taxes paid up at closing.  You may need to give the seller a credit for taxes already paid by them to the end of the tax period, and they may wish reimbursement for oil left in a tank.

At the start of the mortgage process, and even before the contract is entered into, a purchaser should review a good faith estimate of costs before proceeding with the deal, to make sure there is enough money to close.  You should also have a cushion of approximately $5,000 above the good faith estimate for items that cannot be calculated with accuracy in advance, or for items that were underestimated.  Some items don’t need to be listed on the good faith estimate.

A knowledgeable attorney should review the good faith estimate, because I personally have seen some that are much lower than the actual closing costs.   One that I reviewed didn’t even include the statutory amount for title insurance, which is set by law and shouldn’t have to be an estimate.  Many times, bank attorney fees are not included on a good faith estimate.  Also, title search fees may be lower than the title company that your attorney chooses charges. You should compare this with the actual estimated title bill.  Also be aware that different title companies charge different amount for the necessary searches, and there is no set amount by law.

Sometimes you can negotiate to have some of the fees waived, but GET EVERYTHING IN WRITING.  Bring all of your documents, showing the interest rate, mortgage points, fees, commissions, etc. to the closing.  If the bank documents, which are not available to your attorney prior to the closing, do not reflect the proper interest rate, or the bank is deducting more than promised from the mortgage proceeds as their fees, then you need to have proof for you or your attorney to have any leverage in having things fixed.  Also research your mortgage broker, or use a well-known reputable bank.

Recently I have been at closings, either on behalf of my client, or across the table, where the interest rate is slightly higher than promised, the fees are higher than promised, the documents are flat out wrong, or the money does not even fund at the closing.  Sometimes the closings have to be adjourned, which creates problems for people who have made moving plans.  Sometimes the problems are taken care of by calling the mortgage broker to amend the closing costs. The best thing is to be prepared with everything in writing to back up what you’ve been told.  At a closing, saying that someone verbally promised you a waiver of a fee, etc. is most likely not going to be honored. 

Cynthia M. Burke, http://www.nyrealtylaw.com

 

 

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